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Classical and belief-based gift exchange models: Theory and evidence

journal contribution
posted on 2023-05-18, 08:36 authored by S Dhami, M Wei, A al-Nowaihi

We derive and test the predictions of three competing models of gift exchange: Classical (CGE); Augmented (AGE) based on unexpected wage surprises; and Belief-based (BGE) that uses belief hierarchies to formally model reciprocity and guilt-aversion. Following Akerlof (1982), we also introduce signals of the typical wage, θw, and effort level, θe, in similar firms. We examine the worker's optimal effort in response to exogenous variation in the wage, w, the signals θw, θe, and a signal of the firm's expectations of effort from the worker, s. All three models predict gift exchange, however, the predictions of the AGE and the CGE models with respect to θw, θe, and s, are rejected. The BGE model successfully explains the data in all these respects. Gift exchange is underpinned by guilt-aversion. We also provide novel empirical evidence of first order stochastic dominance of first and second order beliefs.

History

Author affiliation

School of Business, University of Leicester

Version

  • AM (Accepted Manuscript)

Published in

Games and Economic Behavior

Volume

138

Pagination

171 - 196

Publisher

Elsevier

issn

0899-8256

eissn

1090-2473

Copyright date

2023

Available date

2024-07-13

Language

en

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